Question

Darin Musical Company manufactures and sells parts for musical gadgets. The business earned net income of $420,000 in 2018, when sales was 6,000 units and data for variable cost per unit and total fixed costs were as follows: Variable expenses per unit: $20 $50 $10 Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead Fixed Selling Costs Fixed Administrative Costs Fixed expenses: $125,000 $75,000 $100,000 Required: i) Compute the expected selling price per unit, using the equation method. Given the sales of 6,000 units, prepare a contribution margin income statement for the year ended December 31, 2018, detailing the components of total fixed costs and clearly showing contribution and net income. iii) iv) Calculate Darin's break-even point in units and in sales dollars. The recession in the economy in 2019 is expected to result in a reduction of the number of units sold. By how much can sales decline in units and sales dollars in 2019 without the company making a loss? Given the expected sales of 6,000 units, graph Darin's CVP relationships clearly showing the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating profit area, the operating loss area and the margin of safety in units and sales dollars. (Use a scale of 2 cm to represent 1,000 units on the x-axis and 2cm to represent $200,000 on the y- axis). vi) The management of Darin Musical Company's profit objective for the period is to increase operating income by 20% in 2019. They expect per unit data and total fixed costs to remain the same in 2019. Determine the number of units that must be sold to earn this target operating profit. Is this a realistic goal? vii) Assume that as a result of reorganizing the production process, Darin Musical Company was able to reduce direct material cost per unit by s5 due to a change in the supplier of raw material used in the production process but the expected sales units of 6,000 units would decrease by 10% in spite of an increase in total fixed costs of $87,000. What must the new selling price per unit be if the company wishes to meet the profit objective for 2019?

Answer 1

Req 1

Net Income	$         420,000.00
Add: Fixed Expenses ( 125000+75000+100000)	$         300,000.00
Total Contribution	$         720,000.00

Selling Price Per Unit= Contribution Per unit + Variable Cost per unit

=(720000/6000)+(20+50+10)

=$120+$80

=$200

Req.2

Income statement for the year 2018
Sales : 6000 units @ $200	$      1,200,000.00
Less: Variable Costs
Direct Material	$         120,000.00
Direct labour	$         300,000.00
Variable Manufacturing Overheads	$            60,000.00
Total Contribution	$         720,000.00
Less: Fixed Costs
Fixed Manufacturing Overheads	$         125,000.00
Fixed Selling Costs	$            75,000.00
Fixed Administrative Costs	$         100,000.00
Net Income or Profit	$         420,000.00

Req 3

Break Even point = Total Fixed Expenses  

Selling Price per unit - Variable cost per unit

=$300000 units

$200-$80

=$300000 Units

$ 120

= 2500 Units

Break even Sales in Dollars = 2500* $200

=$ 500000

Req 4

Expected Decrease in sales 5%

Sales Units is 5700 units

Income statement for the year 2019
Sales : 5700 units @ $200	$      1,140,000.00
Less: Variable Costs
Direct Material	$         114,000.00
Direct labour	$         285,000.00
Variable Manufacturing Overheads	$            57,000.00
Total Contribution	$         684,000.00
Less: Fixed Costs
Fixed Manufacturing Overheads	$         125,000.00
Fixed Selling Costs	$            75,000.00
Fixed Administrative Costs	$         100,000.00
Net income or profit	$         384,000.00